The plea agreement between the Justice Department and SAC Capital Advisors that calls for the firm to pay almost $1.2 billion to resolve insider trading charges is carefully crafted to permit the government to continue its pursuit of Steven A. Cohen, the hedge fund firm’s founder and owner. So while SAC has finally put the government’s criminal case behind it, Mr. Cohen remains the focus of a continuing criminal investigation and an administrative complaint filed by the Securities and Exchange Commission.
Resolving the case was just a matter of time because SAC could put up only token resistance to fight the charges. Corporate criminal liability can be imposed based on a violation by any employee, even if the person violated the firm’s internal policies. Six former analysts had already pleaded guilty to insider trading charges. So the issue was how much SAC would have to pay and whether its guilty plea would be enough to insulate Mr. Cohen, something the Justice Department did not grant.
SAC settled both the criminal charges and a parallel asset forfeiture case in which the Justice Department sought all of the firm’s assets. The payment involves a criminal fine of $900 million and the forfeiture of $900 million of assets. The forfeiture amount was reduced by a previous settlement with the S.E.C. that resulted in a payment of $616 million. The firm also agreed to withdraw from the investment advisory business and not accept funds from outside investors.
In looking at the plea agreement, here are some thoughts about what it means for both SAC and Mr. Cohen:
SAC and its subsidiaries pleaded guilty to each of the five charges in the indictment, unlike most cases in which a defendant admits to only one or two charges. SAC’s guilty plea to each count allowed the government to obtain a larger fine, and the $900 million penalty is higher than the applicable federal sentencing guidelines called for.
The largest trades in the case involved SAC’s sale of Elan and Wyeth shares after a portfolio manager, Matthew Martoma, received information that a drug trial the companies were pursuing had unfavorable results. After Mr. Martoma spoke with Mr. Cohen, SAC sold its position and then shorted the shares, netting gains and avoiding losses totaling about $276 million.
Although SAC pleaded guilty to all the charges, it did not specifically admit that the Elan and Wyeth trading was based on inside information. The plea agreement states that the firm only has to admit that “at least one employee of each of the SAC Entity Defendants engaged in insider trading,†but there was no admission that every trade listed in the indictment resulted in a violation.
The charge against CR Intrinsic, a SAC subsidiary where Mr. Martoma worked that was also named as a defendant, identified two different instances of insider trading â€" one based on the drug trial results and much smaller transactions involving information about Dell and Foundry Networks. Thus, while SAC admitted that there was insider trading at CR Intrinsic, it did not specifically acknowledge its sales of Elan and Wyeth stocks as based on inside information.
That means the firm can continue to support Mr. Martoma as he fights charges filed against him in an upcoming criminal trial, and does not affect civil claims against it filed by investors in Wyeth and Elan.
The plea agreement also protects SAC from being charged with criminal insider trading for any transactions between 1999 and December 31, 2012, including any asset forfeiture action. That gives the firm the comfort of knowing that the Justice Department is pretty much done with it.
The same cannot be said of Mr. Cohen, however. The agreement states that it “provides no immunity from prosecution to any individual.†So the Justice Department can pursue charges for any violation and seek “the maximum term of imprisonment applicable to any such violation of criminal law.â€
The plea agreement does not mean the government is committed to pursuing a case against Mr. Cohen, but it remains open to doing so if it can obtain evidence of violations that implicate him. That effort has failed so far, but not for lack of effort, and we can expect the Justice Department will not rest until it has exhausted every avenue of investigation.
The agreement is made under Federal Rule of Criminal Procedure 11(c)(1)(C), which does not give the court any discretion to vary the terms if the agreement is accepted. Thus, Judge Laura Taylor Swain of the Federal District Court in Manhattan, who is presiding over the criminal case, will have to decide whether to accept the terms imposing the $900 million criminal fine, or reject them and give SAC the opportunity to withdraw.
Federal judges are usually wary of these types of agreements because of the limits on their ability to fashion a sentence to fit the type of violation that occurred and the characteristics of the defendant. But when an organization is the defendant, it is much more likely the agreement will be found acceptable. That is especially true in a case where there is little chance the government unfairly exercised its power over a vulnerable defendant who may have been forced into pleading guilty.
One potential bump in the road to accepting the plea agreement is a letter submitted to Judge Swain on behalf of investors in Elan and Wyeth suing SAC who want to address the terms as victims of the crime. A court is required to give victims the opportunity to raise issues about a guilty plea, and the investors are likely to object to the absence of a specific admission of wrongdoing in SAC’s trading in those companies.
It is not clear whether investors in a company qualify as victims of insider trading. Even if Judge Swain allows them to speak, it is unlikely to derail the plea agreement but may slow down the process of resolving the case.
SAC’s guilty plea does not directly affect the criminal cases of Mr. Martoma and Michael S. Steinberg, another former SAC portfolio manager accused of insider trading. A guilty plea by one defendant cannot be used as evidence against others to show that they committed a crime.
But the publicity surrounding SAC has already been raised by Mr. Steinberg’s counsel as a potential issue in selecting an unbiased jury. With his trial scheduled to begin on Nov. 18, there is a good chance that a motion for a change of venue to move the case outside of New York City will be filed. Although such motions are rarely granted, the widespread attention to SAC’s guilty plea is likely to make the process of selecting jurors to hear the case more difficult if the trial remains in Manhattan.
